What are states doing to arrest slowdown?

It has been more than a month since the 5 per cent bombshell rocked the economy.

Published: 13th October 2019 04:00 AM  |   Last Updated: 13th October 2019 09:49 AM   |  A+A-

economic slowdown

For representational purposes

It has been more than a month since the 5 per cent bombshell rocked the economy. There is scarcely any sign of a change in sentiments. The RBI’s monetary policy document placed consumer confidence at a six-year low. Later in the week, a response to an RTI query revealed 88 defaulters cost public sector banks Rs 1.07 lakh crore. On Thursday, global rating agency Moody’s slashed India’s GDP forecast to 5.8 per cent for the year and said that the government would miss the fiscal deficit target. On Friday, almost on cue, data on industrial production released by the government flashed an ominous red with IIP shrinking to a seven-year low of -1.1 per cent.

The slowdown in the economy isn’t going away any place in any hurry. Worse, it would seem that the economy is, and must be, managed from a corner room of the finance ministry on North Block. The approach of crisis managers, from the weekly announcements and pronouncements, has been to address sentiments — ergo the focus on consequences of the slowdown. But what about the causatives — the structural rigidities, the over-centralisation of policy, the emaciation of states and thinning out of state capacity? 

To paraphrase Sherlock Holmes, the comatose state of states amidst the slowdown is rather curious. A quarter of a century after the liberalisation of 1991, the persistence of incrementalism suggests a strong political consensus for weak reforms. This month, two major states, Haryana and Maharashtra, both representative of the transition of the economy from agrarian to industry and services, are heading for polls. Neither the slowdown nor any special effort by the states to grow the economy is making a mark in the campaign discourse. 

For sure there are no silver bullets to fix the slowdown in the economy. But a crisis is the best time to shift from status quo, to propel ideas that carry the promise of sustainable growth. The question that begs to be asked is can the economy grow without dynamic, pro-active propulsion of growth by the states. What are the states doing to arrest the slowdown?

The unstated fact is that the operating system of the economy is structurally centralised whereas what is needed is an Android approach to promoting growth. Every major next-generation reform must come from the states. Yet there is scarcely any movement on liberating land, labour or on cleaning up clearances and regulatory cholesterol. This column highlighted that businesses are subject to over 1,900 compliance requirements stemming from 91 central and 31 state laws. Notwithstanding committees, factors of productivity continue to be shackled — A draft code cleaning up labour laws circulated to states has been mothballed for 36 months. 

At a conceptual level, the slowdown is about demand for goods and services — whether automobiles, apartments or innerwear. It is no secret that job creation has suffered and uncertainties and anxiety are impacting the ability of families to consume. It bears mention that job creation is asymmetric across the economy. Therefore, A government job is much valued in rural India. But states have left over 20 lakh posts vacant — of teachers, health workers, police personnel et al as it is electorally profitable to spend the money on sops. It would be useful to see how states fared after the intervention of the PMO in 2017 on vacant posts.  

Earlier this week, Power Minister R K Singh read chapter and verse from the riot act. Pointing out that the “future of the country is more important than votes,” Singh upbraided states for their inability to rein in the losses of state electricity boards, with outstanding dues of over Rs 47,000 crore and mounting losses. But just rhetoric has a limited shelf value. Every year state governments mount jamborees to attract investments. Availability and affordability of electricity is critical. The cost of power to industry at around Rs 8 per unit, thanks to the populist free power regime, is inconsistent with the aspiration to attract investment. 

For decades India’s electricity sector has suffered from a socialist myth that there can be a market of sellers without buyers. The cure for SEBs losing a quarter of the power supplied is located in installing competition at the last mile. The BJP has a historic majority in Delhi and is in power in over 15 states. Unbundling of the last mile could curb theft, losses, create jobs and boost growth. Yet its chief ministers in the states balk at the very idea.

The level of rural indebtedness and agrarian distress is well documented — surveys have repeatedly validated that the next generation of land owning families would rather not be in farming. Farmers suffer from poor access to material and technology inputs. They lack access to markets and price opportunities. Collective or contract farming can address the design and delivery of a new market-oriented cropping pattern. Yet the model law for contract farming designed by the Centre is languishing — as are the promises to disband politically-backed cartels masquerading as APMCs!

The litany of what should have been, but has not been, done is long. India’s economy is simply the sum of the output of states. This government coined the phraseology of ‘Team India’. How about getting chief ministers to flank Nirmala Sitharaman at the next weekly dose of announcements– let India know what is being done to propel investment, job creation and growth!
 shankkar.aiyar@gmail.com

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